When we were talking about IRS audits a few weeks ago, we mentioned that audits are no longer random. The IRS has filters in place that flag tax returns that fall outside of the norm or include information that requires a closer look. One example was a return that reported $60,000 in income with $30,000 in charitable deductions. It just does not look right, so the return is flagged for review.
After hearing the results of a recent study by the Treasury Inspector General for Tax Administration, the IRS said it will be adding another audit filter to the mix. This filter will address what TIGTA calls the “alimony gap.”
For many of us, the word “alimony” sounds almost quaint, a little retro. The common term now is “spousal maintenance.” The meaning is the same: When a couple divorces, they have the option of agreeing that one spouse will pay the other a set amount, usually on a monthly basis, for a certain period of time.
The idea is to help the receiving spouse get back on his or her feet financially, to make up for the lack of income from the ex’s paycheck. Because it is, in theory, replacing income, the IRS has specific rules about how each ex-spouse reports it.
The IRS requires the receiving spouse to report the alimony payments as income. The spouse paying the alimony must deduct that amount. So, Wendy agrees to pay Harry $1,000 a month in spousal maintenance. She reports the $12,000 for tax year 2014 as a deduction. She also includes Harry’s tax identification number (if he’s a citizen, it’s his Social Security number) on her return. For his part, Harry reports the $12,000 as income.
What TIGTA discovered, though, is that taxpayers are not always following these fairly simple rules. We’ll explain more next week.
Source: Wall Street Journal, “The IRS Cracks Down on Alimony,” Laura Saunders, May 23, 2014